January 16, 2009

Tapping Out A Gentle Layoff StrategyBy GARY M. STERN

A pink slip could color your company's reputation. In a digital age where few secrets remain, downsized workers aretelling the world in a nanosecond about how they've been treated on Internet hubs like Twitter, MySpace andFacebook. But some gutsy CEOs are getting a jump-start on disgruntled employees by using the Web to defuse theimpact of layoffs.

It's a sign of the times. A Society of Human Resource Management survey in December 2008 noted that 48% ofcompanies downsized in 2008 and that 60% planned reductions in 2009. Cutting staff has become the norm at manyemployers.

The Internet has altered how companies communicate downsizing news. If employees feel abused, they tarnish thecompany's reputation on social networks, making it harder to recruit talented staff in the future.

The morale of many survivors depends on how fairly the organization treats laid-off employees. In order to seizecontrol of the message, some CEOs are communicating layoff news on blogs and social networks.

E-tailer Zappos has held its own in a sluggish economy. In fact, the online shoe seller's revenue rose from $840million in 2007 to $1 billion in 2008, though it fell short of its expected $1.1 billion in sales, noted Tony Hsieh, Zappos'CEO, who's based in Las Vegas.

To stay competitive, Zappos laid off 125 people, or about 8% of its 1,460 staffers, in November 2008. Most managersdelivered the bad news one-on-one, though some call centers' managers, who had larger staffs, notified teams insmall groups.

Layoffs were determined by performance, and in the case of call center staff, attendance and reliability. Staff waspaid through the end of the year, received severance pay of one month for every year they worked, and their healthplan was extended for six months. In addition, existing staff were offered counseling to deal with their stress.

After staff members were informed of their dismissals, CEO Hsieh sent an e-mail to staff, explaining why the reductionwas done, how financial revenue goals hadn't been met, and described the staff's severance packages. He thenposted that e-mail on a special Twitter section for Zappos' employees.

Twitter is a free social messaging service that works in real-time.

Why disclose specifics about the layoffs on Twitter rather than keep it under the radar screen as many companiesdo? Hsieh said that Zappos' success depends on its 10 core values including "open and honest communication.We're open with everything on how we run our business internally. When people don't know what's going on, rumorsstart," he said.

Aneil Mishra, an associate professor of management at Wake Forest University's Babcock School who writes about

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the effects of downsizing, said having the CEO communicate with staff on a social network enables the company tocontrol the message. "It gets the company ahead of other people who will put their own spin on it," Mishra said.

Having the CEO deliver a personal explanation about the necessity for cutting staff also sends a message that theleader cares about the people and the company. "It's direct, unfiltered communication, (and) demonstrates reliabilityand competence despite this unfortunate downsizing," Mishra said. That can help restore, not destroy, trust, he added.

But just announcing the downsizing and why it was required may not be enough. Leaders have to "craft a strong visionof the future. If the CEO doesn't tell people how the company is going to get better, it will lose the best and thebrightest," Mishra said. Downsizing may reduce expenses, but it won't boost revenue, find new markets or establishnew lines of business.

"How you treat staff affects your bottom line," explained Robb Van Cleave, chairman of the Society of HumanResource Management, the largest HR organization in the U.S. with 250,000 members. If a company has to rehiredismissed staff when business picks up, treating downsized staff compassionately can help win them back, he said.

To ease the pain of downsizing and get the most out of remaining staff, Mishra recommends specific training formanagers to handle the dismissals. Managers must deliver the news "empathetically and convincingly and be trainedto answer any questions," he noted.

Both Mishra and Van Cleave emphasize that layoffs should only be done as a last resort. "The cost of hiringreplacements when the economy bounces back can exceed the value of what you've saved," Van Cleave said.Companies such as Southwest Airlines (LUV) and Toyota Motor (TM) have kept to a no-layoff policy despite facinga decline in business and faltering stock prices. "If you have the right people, human capital is your company'sgreatest asset," Van Cleave noted.

But Hsieh said that downsizing can help a company reorganize and focus on its core strengths. When Zappos, whichhas been in business for almost 10 years, had its first staff cutbacks in its early days when it only had about 50workers, it forced the company "to concentrate on customer service. It shaped us into what we are today," Hsiehsaid.

The Internet can also exacerbate already tough downsizing situations. In 2007, electronics retailer Circuit City notifiedits senior managers via e-mail that they were being downsized, which destroyed staff morale and damaged thecompany's reputation.

Announcing a staff cut via e-mail sends an "anonymous, depersonalized message. It treats staff like a widget andsays we don't care about you," Mishra said.

If downsizing is the only alternative, staff still must be "empowered to make the company better," Mishra said. CEOsmust explain exactly what the plan is to boost revenue, the role each employee plays in the recovery, and whatexactly is expected of them. Making staff think like entrepreneurs can help a company regain its momentum, despitelosing valued staff.

The key to limiting the pain of downsizing is to "be open and honest about the whole process," said Zappos' Hsieh.

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